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Financial Stability and Monetary Policy Reaction: Evidence from the GCC Countries

Elsayed, Ahmed H. and Naifar, Nader and Nasreen, Samia (2022) 'Financial Stability and Monetary Policy Reaction: Evidence from the GCC Countries.', Quarterly review of economics and finance. .


This paper investigates the interaction between monetary policy and financial stability in the Gulf Cooperation Council (hereafter GCC) countries by introducing a new composite financial stability index to monitor the financial vulnerabilities and crisis periods. To this end, the study estimated monetary policy reaction functions for each GCC country (namely, Bahrain, Kuwait, Saudi Arabia, and the United Arab Emirates) using the Nonlinear Autoregressive Distributed Lag Model (NARDL) over the period from 2006-Q4 to 2020-Q2. Empirical findings indicate that monetary authorities' response to the deviation of inflation from their target level, output gap, or exchange rate movement differ in magnitude, sign, and significance across the GCC countries. The results further explain that monetary authorities react significantly to negative or positive shocks to financial stability, but they react differently in the short or long term. Overall, an augmented Taylor rule including financial stability as an additional monetary policy target is more appropriate for the GCC countries.

Item Type:Article
Full text:Publisher-imposed embargo until 14 March 2024.
(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives 4.0.
File format - PDF
Publisher Web site:
Publisher statement:© 2022. This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Date accepted:10 March 2022
Date deposited:15 March 2022
Date of first online publication:14 March 2022
Date first made open access:14 March 2024

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